Parliament passes bill for easier debt recovery

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Parliament today passed a bill which empowers banks to confiscate security in the case of loan default, a development that assumes significance in view of the episode surrounding industrialist Vijay Mallya.
The Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016, will not, however, apply to loans for agricultural land as well as student loans.
The bill, approved by Lok Sabha last week and cleared by Rajya Sabha today, amends four laws — Sarfaesi Act, DRT Act, Indian Stamp Act and Depositories Act. Replying to a debate on the bill, Finance Minister Arun Jaitley emphasised the need for “firmness coupled with fairness” in recovering bad loans. He said the banks must be empowered to take effective legal action against defaulters and the insolvency law, securitisation law and DRT law are steps in that direction.
“So far the laws were in favour of the defaulters. We tried to correct the balance. There should be firmness, coupled with fairness in recovery of loans,” he said. He said banks should take a “compassionate view” on education loan defaults but there will be no waiver and somebody will have to pay. The Minister further said that fears regarding farm and education loans are “exaggerated”.
Jaitley said banks are supposed to give loans and “if banks start squeezing loans”, there will be no economic growth.
“The cause of worry is when loan becomes either NPA or stressed asset or the activity in which the loans are invested is not generating money,” he said adding in some cases there will be willful default.
The development assumes significance as it comes against the backdrop of the episode involving Mallya, who owes Rs 9,000 crore to banks, but has left the country to take refuge in England.
Jaitley said if loan has been taken it must be repaid. The Minister said stressed assets were mostly in sectors such as steel, power and textile.
The law simplifies the procedure which ensures quick disposal of pending cases of banks and financial institutions by Debt Recovery Tribunal (DRT). DRTs will have to dispose a case in 180 days and the affected party will have to deposit 25 per cent of the amount if he or she chooses to appeal against the order.

There are around 70,000 loan related cases pending in the DRTs. To further stress his point, he said 20 people sitting on bank money prevent the lender from giving credit to another 20,000 people. It should not happen that a bank manager has to keep awake all night after he clears a loan, he said.

Source : http://www.moneycontrol.com/news/economy/parliament-passes-bill-for-easier-debt-recovery_7238101.html?utm_source=ref_article

Stressed asset business ready to take off

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Companies in the distressed assets business have patiently waited for close to a decade to strike gold but got regularly sidestepped by banks that won’t part with their lemons at a reasonable rate.

The wait could come to an end soon, as the burgeoning bad debt burden and their humongous provisioning requirement is putting capital-starved banks in serious jeopardy, with no resolution in sight. The word has spread, bringing in its wake an army of globally savvy vulture funds that are sweeping down to get a chunk of the share.

These investors have ready cash and the government is on their side, allowing the sponsors to hold 100 per cent in a fund, and arming them with the Bankruptcy Code that would give the firms and banks power to wind down a company in mere 180 days, say sector watchers.
Banks, though, are still resisting, sometimes with such unreasonable demands like asking for 100 per cent of the principal amount or more, to offload the bad debt. But, experts say, unless banks become experts in recovering their dues themselves, the lenders won’t be able to hold for long.

“Banks have to offload the bad debts in the market but it remains to be seen how the market emerges,” said Birendra Kumar, managing director (MD) of International Asset Reconstruction Co.

Following the Reserve Bank’s (RBI’s) asset classification norm, a bank has to categorise a stressed loan as a loss and provide an amount equal to it on their books if it remains so for more than three years (provisions increase progressively from 15 per cent to 25 per cent, 40 per cent and then 100 per cent, depending on the age of the bad debt).

“Banks know they can hold the assets for one or two years only. After three-four years, they will have to get rid of it anyway. Otherwise, they not only incur heavy provisions; the assets also lose their viability,” said Siby Antony, MD at Edelweiss ARC.

Bad debts in Indian banks have worsened progressively in the past few years and are now at about Rs 6 lakh crore, up from Rs 4.5 lakh crore in December 2015 and Rs 2.52 lakh crore in December 2013. In the interim, the minimum provisioning requirement has gone up from five per cent to 15 per cent, and capital infusion by the government is not even enough to cover the total capital erosion that banks have witnessed.

TIME TO CLEAR DEBTS
  • Banking sector NPA stood at Rs 5.94 lakh crore in March 2016
  • There are 15 asset reconstruction companies in India; 10, or more  applications awaiting approval
  • RBI directed asset reconstruction companies to pay 15% in cash and rest in security receipts
  • Experts predict emergence of  cash deals
  • Recently, Brookfield and SBI floated $1-billion stressed funds
  • The govt has also directed banks to float distressed funds
  • Bankruptcy Code will give more teeth to recovery

While it is true that Indian banks have managed to recover and upgrade some of the loans, this is not even 15 per cent of the total stress. And, much of the book clean-up has been done by selling the assets to asset reconstruction companies (ARCs).

Typically, ARCs issue security receipts (SRs) to banks and pay about 15 per cent of the asset price upfront. They then act as an agent for banks to recover the dues, earning a spread. ARCs can also buy assets upfront and recover the dues for themselves but that is hardly followed in India. However, this practice could change, with distress funds from round the world setting up shop in India with a deep pocket, ready to buy assets in all-cash deals. According to Birendra Kumar, banks are now reluctant on selling assets on SR basis, as it takes years to recover the due, but the cash discounts offered by the banks is not good enough to attract buyers of stressed assets.

“It would continue to be a mix of SRs and cash. Global players would generally prefer to buy on cash basis, and banks in such situations will have to offer a higher discount,” said Kumar.

According to various estimates, in India, banks sell stressed assets at not more than a 40-45 per cent discount. In the case of a cash deal, globally the practice is to sell assets at not more than 25-30 per cent of the value. “The current size of the ARC industry is a matter of conjecture, given the lack of authoritative data. However, based on the agency’s discussions with market participants, it is understood that SRs are outstanding to the tune of Rs 60,000 crore, backed by NPAs (non-performing assets) close to Rs 1 lakh crore as at end-March 2016,” says a report from India Ratings (Ind-Ra).

About 71.4 per cent of the SRs rated by Ind-Ra belong to the small and medium enterprises segment. Large corporates constitute 9.6 per cent and retail (individuals) account for 19 per cent.So far, 15 ARCs have been given a licence by RBI and at least 10 more are pending with the central bank. Global vulture funds and stressed fund specialists like JC Flowers & Co, Eight Capital Management LLC, SSG and KKR are partnering with domestic firms such as Ambit Holdings, Piramal, etc, for the ARC business. Besides, Brookfield Asset Management, a stressed funds specialist, in partnership with the country’s largest lender, State Bank of India (SBI), is floating a fund to take advantage of the distressed market. The Brookfield-SBI venture has committed $1 billion to start with, underscoring the market’s potential.

Meanwhile, the existing ARCs continue to suffer from lack of capital and the stipulation that assets can be purchased only after paying up at least 15 per cent upfront. This has limited their ability to take large exposure.

“The challenges the older ARCs face are inadequate capital and specialist management expertise to drive turnarounds of acquired stressed assets. The ARC industry has capital of $400-500 million, with the total of stressed assets in the banking sector estimated to be $130 billion,” said Nikhil Shah, the MD at Alvarez & Marsal India, a turnaround specialist. Shah says the new funds that are coming to India will change the game in favour of asset resolution.

“The older ARCs have not demonstrated capability in reviving acquired stressed businesses. The new entrants are expected to be more aggressive in implementing measures like management changes and deploying significant primary capital in the businesses to improve value,” he added.

“The Bankruptcy Code, with its time-bound resolution, will provide ARCs and stressed assets funds more teeth to execute changes in a shorter time frame.”

However, Antony of Edelweiss ARC does not believe the new stressed fund managers would do something drastically different. “With the new relaxation in the Budget, where the government allowed sponsors to hold up to 100 per cent stake in an ARC and allowing 100 per cent foreign direct investment in ARCs via automatic route, the capital issue of ARCs have been addressed,” said Siby of Edelweiss, adding the legal structure is also getting fixed and that will allow stressed funds to grow exponentially. Now, if only banks would listen to reason and lower their prices for stressed funds, a flurry of activity in India’s stressed assets market would become the norm.

 

Source: http://www.business-standard.com/article/finance/stressed-asset-business-ready-to-take-off-116072801716_1.html

India central bank relaxes rule for Basel III liquidity coverage ratio

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The Reserve Bank of India relaxed Basel III-mandated liquidity coverage ratios for banks, allowing the sector to apply an additional one percentage point of the deposits they currently hold as government bonds under their statutory liquidity ratios (SLR).

Banks can now apply up to 11 percent of their deposit base held as SLR – or government securities that banks must hold with the RBI – from 10 percent earlier when calculating their liquidity coverage ratios to meet Basel III requirements, the RBI said in a statement on Thursday.

Liquidity coverage ratio is a capital measure mandated under Basel III norms requiring banks to maintain highly-liquid assets, including government securities, to meet any sudden short-term outflows.

 

RBI/2016-17/25
DBR.BP.BC.No.2/21.04.098/2016-17

July 21, 2016

All Scheduled Commercial Banks
(excluding RRBs)

Dear Sir,

Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards

Please refer to our circulars DBOD.BP.BC.No.120/21.04.098/2013-14 dated June 9, 2014, DBR.BP.BC.No.52/21.04.098/2014-15 dated November 28, 2014 and DBR.BP.BC.No.77/21.04.098/2015-16 dated February 11, 2016 on ‘Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio (LCR), Liquidity Risk Monitoring Tools and LCR Disclosure Standards’.

2. Presently, the assets allowed as the Level 1 High Quality Liquid Assets (HQLAs) for the purpose of computing the LCR of banks, inter alia, include Government securities in excess of the minimum SLR requirement and, within the mandatory SLR requirement, Government securities to the extent allowed by RBI under Marginal Standing Facility (MSF) [presently 2 per cent of the bank’s NDTL] and under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) [presently 8 per cent of the bank’s NDTL].

3. It has been decided that, in addition to the above-mentioned assets, banks will be permitted to reckon government securities held by them up to another 1 per cent of their NDTL under FALLCR within the mandatory SLR requirement as level 1 HQLA for the purpose of computing their LCR. Hence, the total carve-out from SLR available to banks would be 11 per cent of their NDTL. For this purpose, banks should continue to value such reckoned government securities within the mandatory SLR requirement at an amount no greater than their current market value (irrespective of the category of holding the security, i.e., HTM, AFS or HFT).

Yours faithfully,

(Ajay Kumar Choudhary)
Chief General Manager

Source: http://www.reuters.com/article/india-cenbank-lcr

Bandhan Bank reduces microfinance loan rate

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Bandhan Bank on Monday reduced its lending rate for micro loans by 0.6 per cent, bringing down the interest to 19.9 from 20.5 per cent.

This is the third time the bank has reduced its interest rate for such consumers. Immediately after the microfinance institution transformed itself into a bank last August, it had slashed the rate by 1.4 percentage points or 140 basis points (bps), effectively reducing the rate to 21 per cent. In April this year, the rate was reduced by another 0.5 per cent or 50 bps for micro-small-scale sectors, making it 20.5 per cent.

With the latest round of lending rate reduction, Bandhan Bank has pared is micro loan rate by 2.5 percentage points or 250 bps in three stages in less than 11 months since it started operations as a universal bank.

Chandra Shekhar Ghosh, the bank’s chairman and managing director, said: “With the transformation of the micro-lending institution into a bank, the cost of funds has come down so we can afford to lower the interest rates. This reduction will benefit the micro-small scale industry who finds it tough to arrange for their funds.”

Since its launch, the bank has mobilised close to Rs 15,000 crore of deposits.

According to Ghosh, this will not only help attract more people opting for loans, but it will ease their financial burden as well. The cost impact on the bank is stated to be favourable with this decision.

Micro loans are generally granted for 1-2 years.

Currently, Bandhan Bank operates across 29 states and Union Territories through a network of 688 branches, 2,022 doorstep service centres and 237 ATMs with more than 8.77 million customers being served by a team of 21,000 employees. The Kolkata-headquartered bank’s savings bank account interest rate is six per cent for balances above Rs 1 lakh and 4.25 per cent for balances up to Rs 1 lakh. For term deposits, the maximum interest rate offered is 8.25 per cent for one to three years, with an additional 0.5 per cent for senior citizens.

Source: http://www.business-standard.com/article/finance/bandhan-bank-reduces-microfinance-loan-rate-116071800513_1.html

Brexit offers lifeline on $800 billion emerging company debt

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Britain’s vote to exit the European Union (EU) has thrown a lifeline to emerging-market companies facing an $800 billion wall of maturing debt.

By hindering the Federal Reserve’s plan to raise interest rates, the referendum result has led to speculation borrowing costs will remain lower for longer as policy makers attempt to prevent Europe’s turmoil turning into a recession. This means developing-nation companies that borrowed when it was cheaper to do so won’t have to pay more to service those bonds, at least for now.

The prospect of fewer defaults shows how the so-called Brexit vote is proving a blessing for developing-nation companies that need to pay back about $200 billion per year from 2017 to 2020. Economists from the International Monetary Fund (IMF) to the Bank for International Settlements have been warning Fed monetary tightening may set off an increase in corporate failures in emerging markets. Defaults have been climbing since 2013 and reached a seven-year high in the second quarter.

“We might even see a decline in default rates again in the third and fourth quarters of this year,” said Apostolos Bantis, a Dubai-based credit analyst at Commerzbank AG, who recommends investing in Latin American company bonds. “The overall outlook now is more positive for emerging-markets corporates because the Fed is very unlikely to move any time soon following the Brexit.”

Uncertain outcomes

The policy uncertainty engulfing the developed world has boosted the appeal of emerging countries, usually viewed by investors as more vulnerable to political risk. Yields on a Bloomberg index tracking developing-nation corporate bonds have fallen 27 basis points to 5.19% since the UK vote, adding to a recovery that started when oil prices began rebounding from a 20 January low.

The sentiment shift means that defaults are probably past their peak, according to Kathy Collins, an analyst at Aberdeen Asset Management in London. By 28 June, S&P Global Ratings had recorded 10 emerging-market corporate defaults in the second quarter, the worst quarterly tally since mid-2009. The rating company’s 12-month junk-bond default rate climbed to 3.2% at the end of May from 2.9% at the end of April.

“Given where commodity prices are at the moment, we’re not expecting too many more defaults,” Collins said. “In the first six months of this year, we’ve seen a lot of companies be very proactive in terms of tenders and buybacks in the market.”

Buying back

Russia’s Novolipetsk Steel PJSC and shipping operator Sovcomflot OJSC have announced they intend to buy back debt totaling as much as $2 billion. Latin American bonds sales surged over the past week, which HSBC Holdings Plc partly attributed to an increased likelihood of “ultra-low global policy rates” for longer. Brazilian meat packer Marfrig Global Foods SA sold $250 million of securities to repurchase outstanding notes in a push it said would “lengthen its debt maturity profile and reduce the cost of its capital structure.”

The issuance boom may prove short lived if the prospect of Fed tightening re-emerges. The UK’s vote to end its 43-year association with the EU has also ushered in a period of uncertainty for global markets that may eventually turn investors off developing-world assets. In June, the BIS reiterated a warning that emerging market non-bank borrowers that have accumulated $3.3 trillion in dollar debt are coming under strain as their economies slow and currencies weaken.

“If we get some volatility in emerging markets, say from political noise coming from the EU, and there is no access to capital markets from some issuers, that could be really negative,” Badr El Moutawakil, an emerging-market credit strategist at Barclays Plc in London said.

Even after the Brexit dust settles, looming elections in the US, Germany, France and possibly the UK mean a lengthening list of potentially disruptive events, strengthening the hands of dovish central bankers. Emerging-market companies have raised $3.71 billion of international bonds since the UK’s referendum on 23 June.

“External factors are more supportive,” said Bantis from Commerzbank. “The default trend of the past quarter is unlikely to continue.” Bloomberg

Source: http://www.livemint.com/Politics/sCZ90ORt2l0cm0rnS0DIqJ/Brexit-offers-lifeline-on-800-billion-emerging-company-debt.html

Submit data on loan defaulters to credit information firms, RBI tells banks

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The Reserve Bank of India has advised banks and financial institutions to submit data on defaulting borrowers from December 2014 onwards to Credit Information Companies (CICs) and not to the RBI.

Releasing this information, obtained through a portal complaint, Delhi-based Right to Information activist Subhash Chandra Agrawal said on Friday that it is significant to note that the RBI has not so far complied with the Supreme Court order of December 12, 2015, in the RBI vs PP Kapoor (Civil 94 of 2015) case, where it wanted the RBI to make public details of the top 100 loan defaulters among industrialists.

The details required including the names of the businessmen, firm name, principal amount, interest amount, date of default, and date of availing the loan.

In a June 24 letter addressed to Agrawal in response to his PG Portal complaint dated April 24, the RBI said it has submitted to the Supreme Court a list of defaulters above Rs. 500 crore in a sealed cover and claimed that the said information is confidential and requested that it may not be revealed to the public.

The matter is still under consideration of the Supreme Court.

Source: http://www.thehindubusinessline.com/money-and-banking/submit-data-on-loan-defaulters-to-credit-information-firms-rbi-tells-banks/article8797928.ece